Pension funds’ fury as government caps ground rents from 2028
by James Riding ; Living Inside Housing
Furious pension funds have lashed out at the government after it pledged to cap ground rents for leaseholders at £250.
Ground rent investors raged at the proposed cap, which is set to come into force from 2028, warning that it could reduce institutional investment in housebuilding and undermine the government’s target of delivering 1.5 million new homes.
But the cap, which features in a draft Commonhold and Leasehold Reform Bill published on 27 January, was welcomed by leasehold campaigners, who said it would ease financial pressures for homeowners and make homes easier to sell and remortgage.
Asset manager M&G, which is directly exposed to £722m of ground rent assets, called the cap “disproportionate” and said it would negatively impact savers and companies that have chosen to invest in UK assets.
Andrea Rossi, group chief executive of M&G, said:
“We are disappointed that we have not been able to agree a proportionate solution that works for all parties.”
Once the cap takes effect in 2028, M&G expects a £15m reduction in annual adjusted operating profit and underlying capital generation.
However, Mr Rossi added that M&G’s “strong financial position” means the company is
“well positioned to absorb and manage the negative impacts generated by this proposed legislation”.
A spokesperson for the Residential Freehold Association (RFA) called the ground rent cap
“a wholly unjustified interference with existing property rights”
that would
“seriously damage investor confidence in the UK housing market and send a dangerous and unprecedented signal to the wider institutional investment sector”.
They continued:
“The government’s draft bill will tear up long-established contracts and property rights, which are pillars of the UK’s investment reputation.”
It would, according to the spokesperson, result in a
“forced exit of professional freeholders from the sector” that will “hinder building safety projects and disrupt the day-to-day lives of residents”.
The RFA added that uncertainty from the cap is
“likely to reduce institutional investment in residential development, further undermining the government’s target of delivering 1.5 million new homes, particularly new build flats”.
Danny Pinder, director of policy at the British Property Federation, which represents developers, said:
“While we agree that rapidly escalating ground rents should be addressed, the proposed cap will interfere with investments made by pension funds and institutional investors over many years and undermine the government’s pursuit of investment in this country.”
He added that
“these changes will have an impact on freeholders – the value of their assets and their ability to match index-linked pension liabilities”.
Mr Pinder said that
“adequate compensation must be provided to these entities as they have invested in good faith in order to meet their liabilities and continue to fund everyone’s pensions”.
The Labour government’s promise to cap ground rent at £250 is already a concession from the preference of a peppercorn rent of zero financial value that housing minister Matthew Pennycook previously shared in opposition.
Under the new plans, ground rents will be capped at £250 a year per property from late 2028 for a period of 40 years, after which ground rents will be reduced to zero.
Freeholders have argued that ground rents provide them with dependable income to manage properties and cover costs, including those relating to fire safety.
Jo Darbyshire, co-founder of the National Leasehold Campaign, said the ground rent cap
“will make a difference” for people who bought new build properties in the last 20 years with “punitive ground rents”.
She added:
“Ground rent is a charge for no service. It’s money for nothing. It’s also encouraging that the government recognises that monetary ground rents must end. However, 40 years is an incredibly long time to wait for peppercorn ground rents.”
Harry
Harry Scoffin, founder of campaign group Free Leaseholders, said:
“If leaseholders are paying for nothing, they should be paying nothing today, not in 2068. A ground rent cap not taking effect until the end of 2028 is far too close to the next general election, repeating the foot-dragging of governments of old.”
“This legislation reeks of the timidity of Big Money,”
he added.
Housing secretary Steve Reed said:
“We said we’d be on the side of leaseholders – which is why today we are capping ground rent, helping millions of leaseholders by saving them money and giving them control over their home.
“The leasehold system has tainted the dream of homeownership for so many. We are taking action where others have failed – strengthening homeownership and calling time on leasehold for good.”
The draft commonhold bill also includes a new process to make it easier for existing leaseholders to convert to commonhold, under a revamped commonhold model where homeowners will receive a stake in the ownership of their buildings with greater control over how the building is managed.
Officials said the reinvigorated commonhold system will work for all types of developments as well as mortgage lenders, with strong management rules in place around repairs and leadership and greater rights for homeowners.
Those living in a commonhold building will have a say in the annual budget and how the building is run, and new protections when things go wrong. Current leaseholders will also be given the opportunity to switch to commonhold where a majority of residents agree to it.
